What are service charge accounts?

Service charge accounts can be a complex part of property management. There is a lot to consider and they have become a bone of contention between leaseholders and freeholders or landlords and tenants in the past.

To help you to better understand this important part of property management, Leonherman has compiled this guide to share our expertise in service charge accounts

Read on to find out your requirements and everything you need to know.

What is a service charge for a property?

A service charge is a payment a tenant or leaseholder must make towards the cost of services and repairs to the wider premises on which their property sits.  For example, if a resident lives in a block of flats that includes a communal garden, the cost of maintaining that garden is covered by the charge that all residents contribute to. 

Other services can include:

  • General repairs and maintenance
  • Electricity bills for communal areas
  • Cleaning of stairwells and other areas

They are usually paid in advance and the frequency of the payments will be stated in the lease.  In most cases, this will be quarterly, annually or bi-annually. Where a managing agent is involved, the charges may also include the agent’s fees. 

Amounts vary from one year to another, so the charge is determined by estimates based on previous years. 

Once the end of the financial year comes, the accounts are formalised and any surplus or shortfall is dealt with in the way the lease determines.

What are service charge accounts for properties?

They are a statement or set of statements that are usually prepared yearly to leaseholders by the property landlord or manager. 

They include the details of actual service charge income and expenditure for the year.  In the realms of accounts and legislation, they are often referred to as a ‘summary of relevant costs’. 

Where can you find details of their accounting?

You will usually find details of how they’re accounted for in the terms of the lease, including things like the costs that can be recovered and the time period that should be covered by the accounts.

The service charges (or relevant costs) are something which leaseholders have a legal right to obtain a summary of.  They are defined by Section 18 (2) of the Landlord Tenant Act 1985 as costs. 

They are any costs incurred by a landlord that connect to ‘matters for which a service charge is payable’.  These must be laid out in detail in the lease and accessible to the leaseholder upon request.  A leaseholder must, in turn, provide these details for their tenants in a breakdown of rent charges.

Do service charge accounts need to be certified?

Many leases dictate that accounts must be certified (or ‘signed off’) by an accountant.  Having said that, there is no legal requirement for them to be certified. 

Why certification is beneficial

Leonherman strongly recommends that you have the accounts certified.  This is because service charges are something that tenants and leaseholders often seek to challenge and, without having been certified by an accountant, there is a possibility that the accounts may not be watertight.

The details of the relevant charges are laid out in the lease and/or tenancy agreement, and leaseholders and tenants are completely within their rights to request full visibility of the accounts. 

Discrepancies

If they find any discrepancies, they will be entitled to dispute the fees, which can potentially cause a major headache for the freeholder or landlord.  Homelessness charity Shelter provides this guide to inform residents of all the things to look for when seeking to dispute service charges, and there are many.

By getting the accounts certified, you ensure they are robust, and Leonherman strives to bring the highest levels of precision and accuracy in our tailored service, designed to meet your needs.

Are service charges needed for commercial properties?

Just as with residential properties, service charges can be applied to commercial property as well. 

Many such properties still require maintenance on the part of the freeholder or landlord, and they can recover these costs from tenants and leaseholders.  Imposing a charge will ensure the funds are available to cover things like:

  • Maintenance and repairs
  • Cleaning
  • Refuse and waste collection
  • Heating
  • Lighting
  • Security

How is a service charge calculated?

It has become common practice to collect service charges annually in advance, so calculations for the costs are estimates for the year ahead. 

Sometimes, this can make the charges look excessive in the eyes of the leaseholder or tenant, but it is designed to prevent large, unexpected bills in the event that major repairs need to be carried out.

Generally speaking, the costs covered by service charges are divided into the following 3 categories:

  • Day-to-day costs:  this includes communal area cleaning, insurance costs and wages for staff
  • Cyclical expenses:  tasks that come up infrequently but are still regular, like drainage maintenance and decoration costs
  • Reserve funds:  sometimes referred to as a ‘sinking fund’, this is kept in reserve to pay for larger, costlier repairs that may arise unexpectedly

A lease or tenancy agreement, should clearly state how service charges are apportioned between residents of a building.  This can be a simple calculation, like 5 flats each paying 20% of the total charges, or there can be more complex calculations based on the sizes of the relevant flats.

Lease

What is the difference between ground rent and service charge?

Ground rent is a yearly sum of rent that is paid to a landlord under the terms of a lease agreement. 

It is a charge for a leasehold flat that relates to longstanding laws dictating that a leaseholder must pay rent to the freeholder.  Often, it is a nominal amount or a very low sum that is not a burden on the leaseholder or tenant to keep up with.

Service charges, on the other hand, relate to costs the freeholder or landlord incur for the maintenance of the building and grounds in which the leasehold properties exist. These expenses vary each year, but will typically mean fees for tenants that are higher than the ground rent.

Final thoughts

There are many things to stay on top of as an investor in the property industry.  We hope this article has provided effective guidance on accounting for service charges. 

While it is possible to handle the accounting yourself, there are many ways it can go wrong.  After all, leaseholders and tenants have rights, and they will not want to be charged excessively for services that need to be carried out on buildings.

To protect yourself against the consequences of errors in your accounts, look for reputable, ICAEW-recognised accountants. 

Leonherman can help, with our strong commitment to going above and beyond to provide best practice and client satisfaction. 

In any case, be sure that your accounts are robust and comprehensive and you will keep your properties in good condition and your tenants happy.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
READ NEXT...
To get a-head in business, subscribe